Drug Compounding: What is it and why do we need it? 

Drug compounding exists to fulfill an unmet medical need by providing patient access to commercially unavailable drug strengths, formulations, and combinations. Compounding pharmacies may not replicate a commercially available drug unless there is a drug shortage, and furthermore, are prohibited from compounding biologics, regardless of drug shortage status. While compounding may be sourced from a Food and Drug Administration (FDA)-approved drug or bulk drug substance of an active pharmaceutical ingredient, the final compounded product is not considered FDA-approved, as it does not undergo FDA review for safety, effectiveness, and manufacturing quality. 

Compounded GLP-1 drugs are a widely known and recent example of compounding. Due to shortages, compounding pharmacies were permitted to make semaglutide and tirzepatide copies. These permissions ended in October 2024 and February 2025, respectively, but likely had a lasting impact on industry and public views of drug compounding. 

Uncoordinated State-Federal Oversight Leads to Inconsistent Regulation Enforcement 

Compounding can occur at outsourcing facilities (also known as 503B pharmacies) or community pharmacies, physicians’ offices, and hospital pharmacies (also known as 503A pharmacies); there are key distinctions between the two types of compounding (Figure 1).  

Figure 1. Types of Compounding Pharmacies 

While the origin of compounding predates modern drug development, compounding pharmacies were not regulated until 1997 under the Food and Drug Administration Modernization Act. Outsourcing facilities did not become federally regulated until 2013, after a catastrophic fungal meningitis outbreak killed 64 people in 2012. The outbreak was linked to a batch of poorly compounded drugs, prompting the reformation of the Food, Drug, and Cosmetic Act through the Drug Quality and Safety Act to establish “outsourcing facilities” regulated by the FDA. Notably, 503A pharmacies adhere to USP 797 (sterile preparations) manufacturing standards, but enforcement lies with state pharmacy boards, leading to varied oversight and prompting many stakeholders to voice concerns over the safety risks associated with compounding and lack of standardized regulation.

Insurance Coverage of Compounded Drugs Varies

Insurance coverage of compounded drugs varies and may be billed to pharmacy and medical benefits. Compounded drug products do not have National Drug Codes; thus, payers will review the compounded drug ingredient list on a case-by-case basis to determine which ingredients will be covered in the pharmacy benefit, typically only choosing to cover ingredients that are FDA-approved.

For medical benefits, physician-administered compounded drugs may be billed using miscellaneous drug coding. Not all payers have readily available coverage policies and there is no consistency across payers, so reimbursement is not certain. Compounded drugs administered in the inpatient setting will not be reimbursed, as they will be bundled into a diagnosis-related group payment.

Future of Compounding is Uncertain

Compounding plays an important role within the pharmaceutical supply chain and distribution by streamlining and mitigating access issues during periods of drug shortages or other constraints.

The regulatory and legal environment of compounding continues is evolving. Recent FDA guidance documents indicate an increase in regulation. For example, in 2024 the FDA proposed a rule that would create Demonstrable Difficulties for Compounding Lists. These would include three categories of drug products for which compounding would not be permitted, regardless of drug shortage statues: (1) drug products produced using hot melt extrusion, (2) liposome drug products, and (3) oral solid modified release drug products that employ coated systems. Additionally, final 503B guidance released in January 2025 states that 503B facilities cannot compound using bulk drug substances while the FDA is deciding whether or not to place the ingredient on the bulk drug substance list.

Lastly, recent lawsuits from the Outsourcing Facilities Association alleges that the FDA’s decision to end the tirzepatide and semaglutide drug shortages violates the Administrative Procedure Act. This suit could be indicative of future hurdles that the FDA may have to overcome to increase regulation over compounding. The Trump administration’s stance on compounding remains to be seen.

Next Steps

The changing landscape of drug compounding and how it fits into the US healthcare ecosystem may create uncertainties for various stakeholders. Avalere can partner with manufacturers, telehealth companies, health plans, patient advocacy groups, provider associations, investors, and pharmacies to help navigate the evolving regulatory environment of compounding.

For more information about how compounding may affect your portfolio, how it impacts patient access, or how Avalere can assist you, please connect with us.

This Insight is the first of a series exploring GLP-1 manufacturing, coverage, safety, and product pipeline. Look out for our next Insight about GLP-1 insurance coverage of marketed and compounded products, coming  in April.